TCS, Infosys, LTIMindtree report better-than-expected earnings; has the IT sector bottomed out?

TCS CEO K Krithivasan in an earnings call said he was confident that FY25 will be better than FY24 as June was the first quarter of broad-based growth that the IT major saw after a few quarters. TCS reported positive addition in headcounts after several quarters. Besides, its biggest vertical BFSI returned to growth sequentially. BFSI clients are expected to increase their spending towards developing integrated models using Cloud and AI in the long-term, TCS suggested.

Infosys CEO Salil Parekh cited a strong start to FY25 and was optimistic following a "strong and broad-based growth", operating margin expansion, robust large deals, and the highest-ever cash generation.

In the case of LTIMindtree, which in January this year deferred its aspirational margin guidance of 17-18% "for a few quarters", clients were finally resuming the high-priority transformation projects.

Meanwhile, L&T Technologies CEO & MD Amit Chadha said his company's new strategy is driving a significant increase in the pipeline and large deal discussions that make it confident of a pickup in growth momentum. Chadha said he sees EBIT margin improving in the coming quarters as growth gets, again, 'broad-based' across segments. Chadha's company maintained its FY25 revenue growth guidance of 8-10 per cent in constant currency terms and said it was committed towards achieving the $1.5 billion revenue run rate.

Similarly, Wipro’s management said the momentum built in Q1 across industries and sectors gives it confidence about its ability to execute better on bookings and profitable growth, as the ocmpany transitions to the September quarter.

It guided for CC revenue growth of minus 1 per cent to 1 per cent for September quarter, which was better than its revenue guidance of minus 1.5 per cent to 0.5 per cent for June quarter.

Is the uncertainty over?

Krithivasan of TCS, the largest domestic IT firm by revenues, was hesitant to say his company’s growth had bottomed out. Krithivasan said the IT major did not see a material change between the customer sentiment between March and June quarters. He added that clients continue to validate projects, and cost-optimisation projects get a priority over new discretionary projects if they are not able to see a short-term return on investment.

What Krithivasan said on client sentiment is similar to commentaries by global IT majors. Yet, commentaries sound optimistic. There could be one new area of growth ahead: Generative AI (Gen AI). Accenture, while reporting results for quarter ended May 31, said it generated $2 billion in Gen AI sales year-to-date.

HCL Tech’s management in its earnings call said it continued to see a lot of AI and GenAI-related opportunities. It had launched HCLTech AI Force, a generative AI and automation platform a couple of months ago and has launched another suite of products HCLTech Enterprise AI Boundary. It noted that it was engaged into multiple ongoing engagements where it was working with clients to deliver real value.

Infosys’ Parekh too said his company’s focused approach for generative AI for enterprises has resulted in strong traction with clients.

What could act as a catalyst for the sector is the start of an interest rate-cut cycle in the US. The Fed Chair Jerome Powell recently said the inflation rate was headed back to its 2% target. Fed policy makers also suggested that the US central bank is closer to cutting rates. Street is anticipating at least rate cuts ahead, with the first anticipated to come as early as September.

If this happens, it can potentially push clients to revive their spending cycles, which could bring back discretionary demand.

The BSE IT index has climbed 13%in the last one month against a 4% rise in the BSE Sensex. Clearly, the market has started thinking about such prospects. Will IT firms deliver? Only time will tell.